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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

Best of Doug Noland
April 2, 2008
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The Fed and Administration finally are said to have discovered the right antidote – crisis resolved – buy financial stocks! I will caution, however, that U.S. and global markets this week had "dislocation" written all over them. First of all, there is the issue of a problematic dislocation in the massive "repo" market to resolve. We all should hope and pray that this is not the next "contemporary" financing market buckling under the forces of contagion. And to see commodities break down while financial stocks go into spectacular melt-up mode forebodes only greater losses for leveraged speculators in the troubled "market neutral" and "quant" arenas. The short financials and long commodities "pairs trade" was quickly added to the list of favorite trades gone sour. And those (and there were many) using March options (especially financial sector derivatives) to hedge market risk saw this strategy go up in flames as well. Speculators that were long international markets against shorts in the U.S. were similarly crushed. And speculators hedging with short positions in agency, agency MBS, and many other fixed-income derivative indices quickly found themselves on the wrong side of hasty developments.

Surely, policymakers were keen to mete out some punishment on the increasingly destabilizing "systemic risk trade" (shorting stocks, bonds, Credit derivative indices, buying bearish derivative products, etc.), but the upshot was only further destabilization. News that the GSEs were Back in the Game in a Big Way added to an already highly unsettled situation for myriad sophisticated trading strategies. But before getting too excited about the spectacular short-squeeze, keep in mind that shorting has become an instrumental facet of leveraged speculator trading strategies – and, really, "contemporary finance" more broadly speaking. And the disintegration of an ever increasing number of hedge fund and Wall Street strategies, as I’ve written previously, remains at the Heart of Deepening Monetary Disorder.

Not surprisingly, the Fed could not risk a Bear Stearns failure - not with all of its derivative, "repo" and counterparty exposures. It really was not a difficult fix. Yet the rapidly lengthening line of vulnerable non-bank lenders (Thornburg, CIT Group, and Rescap come immediately to mind) and hedge funds will pose a greater challenge. There are some very substantial balance sheets at risk and significantly more "de-leveraging" in the offing - and the big banks will have no appetite.

The S&P500 is down a modest 7% from the much changed financial and economic world of one year ago. While having little impact on the Unfolding Credit Crisis (or home prices), policymakers have thus far largely succeeded in sustaining inflated U.S. stock prices. But, in reality, the profound deterioration in the U.S. and global Credit backdrop has greatly altered prospects for the vast majority of companies, industries, and the U.S. and global economies more generally. Despite any number of policy actions and all the good intentions imaginable, there is absolutely no way that the U.S financial system will now be capable of sustaining either the (pre-bust) quantity of Credit or the uniform flow of finance that levitated Bubble Economy asset prices, household incomes, corporate cash-flows, "investment" spending or consumption. Huge sections of the Credit infrastructures (notably throughout Wall Street-backed finance) are inoperable and disCredited. Prominent Monetary Processes have been broken and the resulting Flow of Finance radically revamped.

Prospective Credit and financial flows will prove insufficient for scores of companies, as well as for state and local governments and various entities all along the economic food chain. Enormous numbers of business downsizings and failures – many by companies that thrived during the Bubble Era – will lead to huge losses of jobs and incomes (many at the "upper end" where the greatest excesses transpired). I simply see no way around it – Nationalization of U.S. mortgages notwithstanding. It is fundamental to my analytical framework that efforts to subvert the Unavoidable Adjustment Process only extend the misallocation of finance and real resources, while adding greatly to the future burden of the financial institutions today aggressively intermediating very risky pre-adjustment Credit (certainly including the banking system and GSEs). And I certainly don’t believe this week’s rally in the dollar should be viewed as a vote of confidence for the direction of U.S. policymaking. Nationalization will prove a further blow to already fragile confidence.

Doug Noland is a market strategist at Prudent Bear Funds. Their website is